Does Tender of Documents Before an Amendment make the Amendment Effective?
UCP500 Article 9(d)(ii) stipulates: “ The issuing bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). ” As an interpretation to the underlying intention of this stipulation, “Documentary Credits – UCP500 and 400 Compared” (ICC Publication No 511) clarifies that “ this practice simplifies reliance by the beneficiary who would otherwise risk cancellation of the communicated amendment though issued but advice of it not received by him. ” It is well established that as to the issuing bank the release of the amendment from its control enforces the issuing bank subject to the amendment and as to the beneficiary only his acceptance of the amendment shall make an amendment effective.
UCP500 Article 9(d)(iii) then follows to read “If the beneficiary fails to give such notification, the tender of documents to the nominated bank or issuing bank, that conform to the credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the beneficiary of such amendment(s) and as of that moment the credit will be amended.” It emphasizes and confirms an alternative way, the beneficiary’s tender of documents, by which banks may check whether the amendment is effective or not. ICC Opinion R258 [1] and R315 [2] also illustrate the view that acceptance or rejection of amendment(s) may be signified by way of separate advice or the manner in which the documents are drawn up and tendered to the nominated and issuing banks.
However, a controversial question arises basing on the above two stipulations which are definitely set out in UCP500: if documents issued and presented to the nominated bank before the time of issuance of the amendment are however received by the issuing bankafter the time of issuance of the amendment, whether the issuing bank should examine the documents according to the amended terms and conditions of the credit or not? One point of view is that the amendment is not effective and the issuing bank can not examine documents against this amendment as the beneficiary’s presentation of documents which occurred before his receipt of the amendment can not represent his real intention to accept the amendment or not. Conversely, the other point of view holds that as long as the issuing bank receives documents after he issues the amendment, if the documents presented are complied with the amended terms and conditions of the credit, the issuing bank should deem the compliant tender as an acceptance of the amendment from the beneficiary regardless of whether the beneficiary presents the documents before or after he receives the amendment.
Unfortunately it seems that no ICC opinions and relative legal cases concerned this controversial issue. To be or not to be deemed as an effective amendment, this author just attempts to take analyses with the following lines of considerations:
1. There is no requirement in UCP500, ICC Position Paper No.1 and ICC opinions that the beneficiary’s tender of documents will be deemed to be notification of acceptance or refusal by the beneficiary of the amendment on the condition that such tender must be made after the issuance of the amendment. It is also not a common practice reflected in international standard banking practice, at least not in the ISBP(ICC Pub.645). On the contrary, it is against documentary credit practice if the effectiveness of the amendment depends on the time of tender of documents by the beneficiary to some extent, because UCP500 does not require the advising bank have a duty to inform the issuing bank when the beneficiary has been advised of the amendment and so it is impossible or hard for the issuing bank to determine whether the presentation satisfies the said time condition. If such requirement for time condition is insisted on, it will place an improper burden on the issuing bank and will reduce the efficiency of the credit device. It is also against the fundamental rule of the UCP that a document checker should not determine discrepancies basing on the material facts instead of facial compliance as reflected in Articles 13 & 14 of UCP 500.
2. From another perspective of trade practice, we will discover that the issuing bank’s amendment is just the result of the many rounds of discussions and negotiations between the beneficiary and the applicant. So the beneficiary is in fact one of the parties in the creation of the amendments and has already known the contents of the amendments before the amendment has reached him. So it is not unreasonable to deem the beneficiary’s tender of documents which are complied with the amended credit as his acceptance of the amendment when it occurs before receipt of the amendment by him.
3. As we all know, in the international documentary credit practice the intention of the beneficiary to present documents under a credit is always for payment, not for refusal, but the issuing bank’s payment undertaking must be against compliant presentation. As such, should the beneficiary make a discrepant presentation for payment, we may deem in good commercial sense the beneficiary’s tender of discrepant documents as his request for amendments which may cause the discrepant documents to be compliant. Facing the beneficiary’s such discrepant presentation, the issuing bank
1) may refuse the documents and discharge his payment undertaking under the credit. As such, the refusal may be deemed to be a rejection for both payment and amendments.
2) may issue an amendment to cure the discrepancies and honor the documents. As such, the amendment may be deemed as an acceptance by the issuing bank in the request of the beneficiary for amendments.
3) may neither refuse nor issue an relative amendment, but effect payment instead. More complicated in this case, the issuing bank’s payment does not necessarily signify its acceptance of beneficiary’s offer for amendments, because the payment may be the result of the applicant’s waiver of discrepancies without issuing bank’s intention or acceptance to issue relative amendments to the credit.
In line with the above analyses, should the amendment by the issuing bank make the discrepant documents compliant, the issuing bank must accept and honor the documents regardless of the timing of the beneficiary’s presentation.
4. When the issuance of an amendment is seemed as an analogue of that of a letter of credit, it may feel easy to get to the point. In the international documentary credit practice the issuing bank must not refuse documents only because the beneficiary presents the documents to the nominated bank before the issuance of the credit. UCP500 Article 22 even allows a document indicating a date of issuance prior to that of the credit so long as such document is presented within the time limits stipulated in both the credit and UCP500. The issuing bank should not be in a position to determine whether the documents are presented before or after the issuance of the credit. All the risks involved when the documents are issued and presented by the beneficiary before receipt of the credit will be born by the beneficiary himself. It is the same in case of amendments.
5. In fact, when the issuing bank is aware that the documents are presented before the issuance of the amendment and does not ensure the beneficiary’s acceptance of the amendment, it may try to obtain the beneficiary’s express notification. In any event, to determine the amendment is ineffective without any express confirmation is not reasonable under international documentary credit practice and against the essence of the credit—— “Letter of credit is a payment mechanism and let us treat it as such” which was illustrated by the late chairman of ICC banking commission, Bernard Wheble.
6. As to the nominated bank, it may examine the documents against original credit when no amendment is received from the issuing bank or advising bank, and against amended credit when the amendment has been received. However, one point merits attention. If the documents presented to the nominated bank within the expiry are discrepant due to no receipt of relative amendment, the issuing bank’s payment undertaking has not been established, and if the documents are then presented to the issuing bank out of expiry, even the amendment issued makes the discrepant documents compliant but does not extend the expiry, the issuing bank may still refuse to pay due to the credit expired.
In sum, this author supports the point of view that both the letter of credit law and documentary credit practice do not thrust the issuing bank into the position of determining whether the beneficiary’s presentation is made before or after the issuance of an amendment, and consequently the issuing bank will be bound to the amendment once the issuing bank receives the documentsconforming to the credit and to the amendment regardless of the presentation made before the issuance of the amendment. This article has also shown, it is hoped, that the analyses from multi-perspectives and from common sense may facilitate the settlement of some complicated and controversial issues.
[1] An opinion from 1997 volume, ICC Banking Commission Collected Opinions(1995-2001)(ICC Publication No. 632) 2002,P88-89.
[2] An opinion from 1998-1999, ICC Banking Commission Collected Opinions(1995-2001)(ICC Publication No. 632) 2002,P96-97.
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Comments by T.O. on the Chinese version of Jia hao’s article
Your opinions are overall reasonable and supported by the principles of UCP 500 as reflected in the quoted Articles.
As requested, I would like to add the following comments:
People often focus too much on the narrow issues when they disagree and confine themselves to argue on narrow perspectives, mostly based on the literal interpretation of the rules, without going out of the problems and see the same issues from broader perspectives, what I call a bird's eye view. When we were caught in a maze, unable to find a way out, we should not try to waste our time exploring for the corners but to fly over the maze and see clearly the way out from the top, if we could.
In case we face a 50/50 situation in our arguments, where either side cannot provide a very good argument to convince the other side, then we may refer to the underlying intent of the rules or the practice. Then from my experience, the blocking pebbles would be removed and the clear water may come out . Some intelligent judges determine complicated and difficult issues in this way and they are remembered long after their deaths, such as Lord Dunning and Lord Diplock.
Your perspectives reflect that you take these approaches. My congratulations for your being able to free yourself out of the entanglements created by the other parties due to focusing too narrowly on the issues.
I wish to add that the timing of the first presentation to the issuing/nominated bank should not be an issue due to following dilemmas it could bring forth:
Let us give one example to explain why we should not dwell on the timing. Let us consider this situation. The L/C has been transferred to 3 second beneficiaries, A, B and C. Amendments are made available to the second beneficiaries The first beneficiary accepts the amendments but some second beneficiary(ies) accept(s) and some refuse(s) the amendments.
Second beneficiary A accepting the amendments presents the documents directly to the issuing bank before the issuance of the amendments, without substitution by the first beneficiary.
Second beneficiary B accepting the amendments, presents the documents to the transferring bank before the issuance of the amendments but after substitution by the first beneficiary with compliant documents, the amendments are already issued. Obviously the first beneficiary should be paid, but should the second beneficiary B also be paid according to the timing argument? If the second beneficiary wants the B/L back after refusal, then what can the first beneficiary/issuing bank do when the B/L is used for claiming the goods?
Second beneficiary C refuses the amendments and presents the documents to the transferring bank and substitution is made after issuance of the amendments Now first beneficiary accepts the amendments but the second beneficiary C refuses the amendments. But the same documents cannot be examined based on different terms. Then which same terms should be used in document examination for the second beneficiary B and also for the first beneficiary, original terms or amended terms? And what if the presentation is received before the issuance of the amendments? What should be based in document examination by the nominated/issuing bank, the original terms or the amended terms?
L/C deals with the face of the documents alone, not the time the documents are prepared or sent. The document checker only has to check whether the presentation is received on or before the expiry date of the L/C. S/he has no authority to go further and check also the times when the documents are prepared, sent or presented to the nominated bank (if the issuing bank receives the presentation before the L/C expiry). This is also not a requirement of the UCP 500. If s/he steps out of his/er comfort zone, s/he is looking for troubles.
A document checker should not determine discrepancies based on the material facts instead of facial compliance as reflected by Articles 13 & 14 of UCP 500. Now since the document checker is not allowed to find out the time of presentation to the issuing bank from the nominated bank, (if the issuing bank receives the presentation before the L/C expiry), then what is the basis of the determination of discrepancies?
Even if we are allowed to consider the times, it won't work because we have two main systems of laws amongst the main trading countries and they are 180 degree different in the effective time of a contract/document. In the Common Law camp, the post office is deemed to be an agent of the recipient. That means once the contract/document is put into the mailbox, the contract/document becomes effective immediately, even if it has not yet been received by the recipient. In the Civil Law camp, the document will become effective and binding to the sending party only after physical receipt by the recipient. So if we were allowed to deal with the different times, then the answer would be different from one country to another. Then can the UCP 500 work as a universal set of Rules? We have to have two versions: UCP Common Law and UCP Civil Law. Hence in order to make UCP work, those times cannot be an issue.
From my own experience as a trader, you are quite right to point out that before the issue of the amendments, there may be many rounds of discussions amongst the parties already. So the beneficiary is in fact one of the parties in the creation of the amendments. So s/he knows the contents of the amendments even before the application of amendment is drafted or sent to the issuing bank. That means in reality, the beneficiary may know about the contents of the amendments even earlier than the issuing bank.
What is the underlying purpose of L/C? Of course it is for a bank to undertake payment irrevocably against compliant documents on the face. If the issuing bank receives the compliant documents on the face, payment must be effected.
I would end with the words of wisdom from the late Bernard Wheble, one of my mentors:
" Document checkers in the banks should determine discrepancies with simple common sense ".
" Letter of credit is a payment mechanism and let us treat it as such ".
Bankers should stop denying payment by raising technical issues when the applicant is in financial trouble or refusing to take up the goods due to loss of profits in the marketplace. Otherwise the image of bankers would suffer. When no one uses L/C, the bankers would lose their jobs!
My congratulations for a very good analysis from you.
Further Comments from T.O. on the English version of Jia hao’s article
If I encounter a controversial issue like the one you have proposed, my experience is to avoid going to the extreme, which would often lead us to a dead end. Instead I would leave the issues and go for a walk in the garden or better come back after a couple of days and re-examine the issue from a fresh angle. Then it is more likely for me to come back to the basic. I would then ask myself: "What is the purpose of letter of credit and amendments?" As quoted by you, the late Bernard Wheble says "Letter of credit is a payment mechanism and let us treat it as such".
In fact, all controversial issues facing a deadlock should move towards this direction, in order to keep the letter of credit system more workable and reliable as a definite payment mechanism. If we try to shift to the limited legal or academic angles, we would only make the letter of credit system highly unpredictable and not functional. We may kill the letter of credit system for taking such approaches.
I often give an example in the training session to convince the audience. Let us imagine that there was a nuclear attack. You were the own one in the world protected from harmful radiations due to hiding in a deep cave, where there were enough clean underground water, insects, worms and vegetation to keep you alive. When you come up from the cave after ten years, you meet the rest of mankind and find that they are all affected by the harmful radiations and become "mad" (according to your own definition) . Then may I ask you a question: "At this material time, who is "mad"? you or the rest of the surviving mankind?" For your social need, which is a basic human need, I am afraid that you have to pretend living like a "normal" (their definition though) person again. Otherwise you would be put in a hospital for the mentally disorder people. This adaptation is acceptable if you look at this issue from a Buddhism perspective. The real truth carries no concept, right or wrong, good or bad. To go to the real truth, we have to drop all conceptual thoughts.
We should try to resolve family dispute in this way too. Otherwise we may divorce more than 500 times in our life. If we ask ourselves: "what is the purpose of our marriage? then we may avoid the conflict. If one cannot change his partner, then change oneself if we wish to live happily thereafter. What I think right in my perspective may be wrong in my wife's different perspective. That is also why we have so many judicial decisions reversed in the appeals.
With such perspective, I support your views on paragraphs 2 which is from a pragmatic angle. I also support your views in paragraph 3 from a common sense angle. However, the arguments in paragraph 3 first part appear more or less mechanical. As you said in paragraph 2, in practice, the beneficiary must have known the content of the amendment, whether the amendments are initiated by the applicant or the beneficiary. So it is a bit unnatural to assume that the beneficiary knows nothing about the amendment and intends to request for an amendment once the documents are determined discrepant.
So your arguments in paragraph 3 (2) and (3) are better. In fact you need not do the three analyses. In case the documents are discrepant, the issuing bank should ask for a wavier from the applicant. If the applicant disagrees, then all of your three analyses would fall flat. If the applicant agrees, the issuing bank needs not show its own card. It simply follows the instruction form the applicant and pay. This is less risky, particularly if the issuing bank, after paying, is sandwiched in a court trial, when no waiver is not received from the applicant.
I agree with your arguments on paragraph 4 which represent the strongest support for your views.